While purchasing an investment property through your self-managed super fund comes with incredible taxation advantages, it does not come with the same benefits of owning a holiday home under your own name.
Owning an investment property at the beach or another seasonal tourist location can be an easy and cost-effective way to secure accommodation for your own family’s summer getaway, but not if your SMSF owns the property.
The Sole Purpose Test
People choose SMSFs so they can have complete control over their investment decisions while receiving favourable tax concessions available to super funds. For your SMSF to be considered compliant, it must meet the sole purpose test which states that the fund can exist only to provide retirement benefits to its members — or to their dependents in the event of death.
Can I stay in my SMSF property if it is vacant?
Due to the Sole Purpose test, you cannot use your SMSF assets for any purpose other than to provide retirement benefits — this means holidaying in an investment property contravenes the sole purpose test and is not allowed.
This rule goes further than just personal use by a member; you are not allowed to rent the property to any of your relatives or associates.
Can I stay in my SMSF holiday house if I pay market rates?
A related party paying market rates in an arm’s length transaction may comply with the dealing at arm’s length basis of investment under the SIS Act. Put simply, if a member or relative rents the house at market rates, it may still be considered acceptable and compliant.
The issue is that there are many different rules and tests that must be satisfied when it comes to the use of assets. Renting an investment property to a related party generally brings rise to an in-house asset. The value of the investment property will be considered an in-house asset and must not exceed 5% of the total value of the SMSF. For example, if you are renting a $500,000 holiday home to your daughter, the minimum total value of your SMSF assets would need to be $10 million to avoid breaching the in-house asset rule.
So while dealing at an arm’s length basis with a related party can be considered okay, you still run the risk of failing the sole purpose test and the in-house asset rule.
What happens if I breach any rules or tests?
Breaching the sole purpose test, in-house asset rule, or the arm’s length commercial basis of investment can have dire consequences. Some possible outcomes include administrative penalties, suspension or removal of trustees, criminal penalties, and loss of the fund’s complying status. Is it really worth risking this for a trip to the beach?
While having a property available for a well-deserved retreat sounds amazing, if you are trying to get around the rules by paying market rent to stay at your SMSF holiday house, you might as well pay market rent to stay at the rental down the road; you get to enjoy your holiday while ensuring the compliance of your SMSF remains steadfast. Generally speaking, staying in your SMSFs investment property is not worth the risk, so jump on to your favourite accommodation booking website and find somewhere else to stay.